China's expanding retail industry including apparel and fashion, food and grocery, furniture retailing, and home electrical appliance is increasingly seeking to outsource its logistics functions to third-party logistics (3PL) service providers to meet the growing need for a variety of higher quality products. Increase in foreign investments also drives demand in the 3PL markets.

The accession of the World Trade Organization (WTO) in 2001 has led to a marked increase in foreign investments, since the restrictions to operate in the logistics industry have been disappearing. Foreign enterprises can now operate as wholly owned subsidiaries, and operate in services such as transport, warehousing, freight forwarding, and others.

"Apart from the increasing penetration of multinationals, the 3PL activity is gaining momentum also due to the need for integrated logistics solution offering, competitive advantage through leaner supply chains, opening more toward outsourcing to focus on core competencies, and benefit from cost savings," observes Frost & Sullivan Research Analyst Aarthi Nandakumar. "As retailers are beginning to realize these benefits, significant growth of 3PL markets is imminent."

By efficiently tackling the challenges of skilled manpower and geographical diversity, 3PL service providers can emerge successful in the Chinese retail sector. Developing strategic partnerships with retailers can help them to capitalize the fully liberalized and open market.

Domestic 3PL service providers can use their understanding of the needs and demands of the local people to their advantage to increase their market share.

"However, the highly diversified geographic needs of the country pose a challenge for service providers," cites Nandakumar. "As the demands of the retail sector vary from region to region, it is crucial that service providers are familiar with the local jurisdictions, which vary with provinces so that the uniformity is maintained in their service offerings."

The retail sector is more prominent in the eastern and southern parts of China, which has consequently led to proliferation of more service providers in that region. These regions already have in place robust road and rail network, while central and western parts are currently witnessing infrastructure improvements to ensure an operating environment that is conducive for logistics service providers.

Government incentives to develop infrastructure are essentially encouraging 3PL service providers. More than 80.0 percent of the investment is directed toward transportation to develop a more integrated network of highways, railways, airports, and ports. Plans for logistics parks and distribution centers offering services such as freight management, warehousing, and inter-modal services are underway.

3PL service providers will have to accurately assess the specific geographic needs and expansion plans, and offer services accordingly to meet the requirements of China's geographic diversity. It is important for service providers to grow in tandem with the continually developing retail sector to emerge as successful 3PL participants in the Chinese retail sector.